Finances for recent CS Ph.Ds headed to academia

As you may have guessed from my recent post analyzing the TCO of my former automobile, and my post on finances for CS Ph.D. students, I've been thinking about finance a bit lately.  After a thought-provoking discussion with a senior colleague in another department, I've come to the conclusion my financial satisfaction graph looked something like this -- and I bet it's similar for many other no-kids-at-completion academics who end up enfamilied (can I make up that word?).

(In case I seem too negative about kids, don't get me wrong.  As the absolutely awesome book All Joy and No Fun notes, being honest about the myriad costs of having a child isn't at odds with also being very glad that the little wriggling worm is in your life.  Great book.  If you haven't read it and you do or may have kids, read it.)

The Taulbee survey suggests that the median assistant professor in Computer Science has a 9mo salary of about $96,055.  Assuming you pay your summers, that's about $128k/year, or $10,672/month.  When you're fresh out of grad school, that's a boatload of money.  (It's actually a little higher:  Many universities toss in about 8% for you into a retirement fund, so total compensation is around $138k/year.)

But having one child in daycare can cost you from $950-$1600/month (or more in expensive cities).  That can be as much as 15% of your gross. Younger children are more expensive because the teacher-to-child ratio is lower.  And, let's be honest:  Over-educated Ph.D. type people tend to try to find really good daycares, and may be willing to pay extra to take advantage of their university's on-campus centers.  (We do this, and I swear by it:  I walk with my daughter to work/school every day, and I love the time we get to spend together, instead of being cooped up with some extra car commute.)  But there's more than that:

• Insurance costs go up
• Life insurance sounds like a really good idea for the next few years
• Spare time for extra-revenue consulting goes down
• You start stashing away for their college fund
• Babysitters become a thing
• You buy kid stuff
• Household and food costs go up and you may choose to outsource more things (cleaning, etc.)
• You got a house to have a little more space than that efficient, tiny apartment you started with

An interesting attribute of the Ph.D. track is that your starting salary is quite reasonable, but you're about 5 or 6 years behind non-Ph.Ds in having been able to start saving.

After a few years of staring at industry salaries and grumbling about your choice to go into academia, things start to improve.  Median associate professor salary goes up to about $148k.  A fresh full professor is at about $190k.  The cost of daycare goes down as your child(ren) get older.  You've paid off more of your mortgage, so your relative savings rate increases.  The relative cost of saving for their college goes down, assuming you contribute a constant amount -- and as they get older and you're still teaching, it becomes more and more likely you can take advantage of your university's tuition benefits, if they offer them.

(I should note that this is all a very first-world problem, as the saying goes:  An academic makes more than enough to be comfortable and secure.  But you do sacrifice salary to choose to stay in the academic environment, in exchange for a much greater degree of flexibility and control over what you do.)

So I started thinking about what I would go back and tell either younger-Dave or my own Ph.D. students.  And here it is:

Things I did right

Live frugally in grad school - and no loans:  You don't have to have a lot of money to have a great time in grad school.  Boston was an expensive place to live, but it was counterbalanced by the fact that I was able to ditch my car before moving there and save all of those expenses.  It's temporary -- don't get a lot of crap, and take advantage of the high churn rate to get cheap stuff when you get there.  Having a buffer of cash for emergencies goes a long way to making grad school lower stress on the financial side.  Goodness knows there's enough stress in getting a Ph.D. anyway -- don't add to it by making the money situation complicated!

If I were advertising shamelessly, I'd note that Pittsburgh has a great cost-of-living, and a grad student can live very well here while remaining frugal.  But that would invite my colleagues on the west coast to post pictures of their beaches, and that arms race never ends well for anyone.

Pay into a Roth IRA during grad school if possible:  As you're painfully aware, grad student stipends will not make you rich.  But the fact that you're in the lowest tax bracket you'll see for the rest of your life makes it an awesome time to stash some money in a Roth IRA.  All of the growth and later withdrawals will happen tax free, and you're paying basically no tax right now anyway.  Live frugally, save the money you make from summer internships, and contribute a bit each year when you're able.  The cool thing about the Roth is that you can take the principal back out, so you're still able to use this as an emergency fund.  But don't.

I did a little of this, but if I could go back, I'd have been even more aggressive about it.  My Roth isn't exciting - I was 39 when I started writing this post in 2015 (and never finished it), and at that time, it had about $50,000 in it - but at 7% average annual growth, by the time I'm 65, that should be worth about $271,000 that I can live off of completely tax free.  That's pretty neat for having saved up in the year after college and during grad school.

Find housing within walking / biking distance to your university:  Huge quality of life boost.  I'm spoiled that this is easy in Pittsburgh, but it's do-able in most places.  Miles walked give back to you in health and happiness.  Miles driven cost in money, health, and happiness.  You're also more likely to get to know your neighbors if you walk, which provides extra bonuses (you'll live longer!).

Have enough money in the bank to cover moving expenses for your first month.  When I moved to Pittsburgh, I had no car, no apartment, no real furniture - pretty much a few boxes of personal stuff, my bikes, my mattress, and some computers.  I lived for two weeks in a hotel while finding a place to live, and then had to front first and last month's rent, a security deposit, spent $17k on a car, visit Ikea to quickly get something to eat on, etc.   I was really lucky on this one - I'd done some consulting towards the end of grad school, got a windfall during the dot-com boom when VA Linux let open source contributors buy into their IPO at the IPO price, saved money from my summer internship at DEC, and had started with some money in the bank from a startup.

But that was a big chunk of cash to lay out in the first month.  Some companies and universities may offer an advance on moving, and you can certainly float a month of expenses on your credit card, but this is one to think about in advance so you're not caught by surprise!  I suggest contacting the university if you think it's going to be a problem and see if they have a way to help.  (h/t Jamie Morgenstern for raising this issue, which also arises for ugrads about to start grad school.)

Things I did wrong

I didn't throw money in index funds and ignore the market.  I made the obvious mistake in grad school of thinking that because I knew the computing industry, I should invest in companies that I thought were going to do well, etc.  Oftentimes, analysts have people like us giving them their opinions already, so it's likely factored into the price.  I also put too much money in NASDAQ index funds, which are tech heavy.  Diversifying through a nice, boring big-market index fund (VTSAX, for example) and then forgetting about it is a much better way to go.

I didn't analyze the TCO of big post-graduation purchases.  After graduation - and with some savings - your new salary seems limitless.  It's not -- because you want to save a lot of it now to avoid that annoying couple of gap years.  I was careful to analyze the expected gas and other costs of my car purchase, for example  (in the final analysis, it turned out to not matter much, because I knew that I drove very little), but I didn't think at the time about the importance of missing out on 10 years of capital appreciation on $17k.  Oops.

You were happy on a grad student stipend.  Suddenly earning $100k more doesn't mean you have to radically amp-up your lifestyle.  You don't need a BMW.  Or a 60" TV -- who're you kidding?  As a stressed-out assistant professor, you're going to be too busy to watch the damn thing.  (grin).  

I picked up a few expensive habits:  This it the "latte a day" thing.  For a while, I was walking past Starbucks on the way in to school.  Ahem.  But when you calculate it out, with compounding, a $3.50 / workday latte habit represents a total cost of $13,160 over ten years.  wince.  I'd like to go back and cut a lot of those out.  Leave the in-store lattes to the full professors whose kids have left home. :)

Things to think about in your last year of Ph.D. / first year of professorship

The core message to remember is that because you went to grad school, you're starting your retirement savings late.  Probably 4 or 5 years later than your friends who graduated from college and took a job at GoogBookSoftZon.  That means you've got a few years less time of compounding, so you want to take advantage of all the opportunities you can to put money into tax-advantaged retirement accounts now.

Depending on when you start, check if you can contribute to a Roth IRA your first year:  After you get started, you'll be over the contribution limit, but if you start in August, your year-long salary will still be low.  This is a perfect few months to save up and throw into a Roth.  Also, assuming no student loans to pay off, try keeping expenses low enough in those first four months to max out your 403(b) contributions as much as you can.  This is the only year where it'll feel a little painful to do so, but it lets you get major tax advantages for that year:  Up to $18,000 less federally taxable money from the 403(b), and $5k added to the Roth that will grow tax free.  This may or may not be feasible, but keep it in mind as a high goal to aim for.  $5k of Roth IRA this year (remember, your tax rate will still be low this year) can grow to around $53k over the ~35 years before you retire.

Put your money in the appropriate-year Vanguard "Target Retirement" fund, or the equivalent at Fidelity.  There may come a time later when you want to think about micro-optimizing this (you can get the same asset allocation with slightly lower fees), but at the start, you'll have so little in there that it's not worth your time.  Spend your brainpower on your career or consulting or startup, or go outside and enjoy a bit of free time.  (h/t Dan Wallach for the suggestion.)

Once you're in a full year where you exceed the Roth threshold, make "backdoor roth" contributions, currently capped at $5500/year.   See this Bogleheads article for the mechanics.  (Tl;dr:  Contribute post-tax money to a traditional IRA account, wait a bit of time, and then roll the traditional IRA over into a Roth IRA).

If you're at a state school, look for a 457 plan.  This can allow you an additional vehicle for pre-tax retirement contributions.  Non-state professors may also have these available, but outside of government, deferred compensation plans like this are restricted to certain highly-compensated employees, and have more risks associated with them.  (h/t Alex Snoeren for the suggestion.)

See if your school offers a high-deductible health care plan with an HSA.  An HSA is a type of savings account that has the magic property that you can use it also as a retirement account.  It's very flexible, and, particularly while you're younger and healthier, this is a great way to go.  See this New York Times article for more details.  Note:  This does not work with an HRA (healthcare reimbursement account) or an FSA;  the latter two must be spent within a certain timeframe and can't be used for long-term savings.

See if your school allows "mega-backdoor-roth" contributions.  A "mega backdoor Roth" is a way of using your existing 403(b) plan to contribute more to your retirement savings.  There's a $53k/year limit on total 403(b) contributions.  You have a personal $18k/year limit on how much you can contribute pre tax.  Your university contributes some - let's say it's another $15k/year.  That leaves a $20k gap.  If your university permits, you can contribute $20k of your post-tax money into the 403(b) plan and then roll that into a Roth 403(b).  See this Mad Fientist article for more info.  I'm curious to hear from you if your University allows it - CMU doesn't seem to.  Quite a few companies do, if you've gone the industry route.

You probably already know and do the rest - put your travel on rewards cards as appropriate, get reimbursed quickly -- I usually recruit my administrative assistant's help in tracking my expenses so I don't lose any.  CS faculty often have enough travel and work expenses that it's easy to lose them here and there.

Ways faculty "bridge the gap" to industry

There's a gap.  It's large.  Every few years, I get a little annoyed about it, and then calm down again. (OK, OK, I got annoyed about it when our child was born and we started paying daycare expenses.) Being an academic has its advantages, but having a pile of cash to sit on provides its own kinds of security.  Two years ago, I pinged a bunch of my colleagues about what they do to bridge the gap. Some people may not mind the gap at all - as came up during that previous discussion, it depends a lot on what your life goals and priorities are.

I probably lean slightly irrationally towards wanting a large savings pile from having gone through most of my childhood with only one parent, who partly-retired after my father died.  The statistics suggest that I'm probably overcompensating slightly by wanting the flexibility of financial independence a bit earlier than many people do, but it doesn't seem like a bad direction in which to err.

The answers I got from my friends and colleagues in academia were pretty similar.  Most universities allow faculty members a day per week of external consulting, and people use that in a few common ways:

• Expert witnessing.  The pay is high (often $400/hr+;  I know some famous senior folks who charge $1100+).  In the cases I've contributed to, it followed a fairly typical pattern:  Fun at first while you're learning the specifics of the case and technology;  productive for a while;  and then excruciatingly boring for a while as you re-hash with the attorneys, for the 18th time, the meaning of the phrase "to connect to", or "insert into a database", or whatnot.  I'd encourage people to try their hand at this at least once or twice, assuming you don't mind getting grilled by the opposing attorneys.  It's an interesting experience and will give you insights into our legal & IP systems you wouldn't get otherwise.
• In-area consulting.  As opposed to expert witnessing, this is usually doing something closer to the forefront of your field.  The pay is typically lower (I often aim for 2-3x my hourly rate, depending on how interesting I find the work), but usually more long-term rewarding, because you're helping create something.  Just be careful of IP agreements and the potential for conflict of interest.
• Startups and one-off opportunities.  High risk, high reward, this one speaks for itself.  You don't just have to do a startup - you might get lucky writing an optimized cryptocurrency miner, for example. :)

Finally, be aware of both the Taulbee survey, as well as the fact that you can find out what your colleagues at many public schools are getting paid.  For example, here's California.  If you select, say, UC Berkeley, you can depress yourself that the six most highly-paid employees are sports coaches.  grin.  Use this information to advocate for getting a fair salary for yourself, and for your entire department.  While some salary issues are a zero-sum game, others are not, and universities have been known to focus on boosting the salaries in specific departments if they need to.

But don't worry about pulling in extra income in your first year or so.  Getting started as a fresh faculty member is already excruciating.  The good news is that it gets better after you're in a groove - but it takes two to three years.  (The moderate good news is not to worry, because the first few years suck for almost everyone, since getting your Ph.D. doesn't usually prepare you for the transition to full-time teaching, grant writing, student mentoring, and service.)  If you're just about to start your faculty journey, good luck and have fun!

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Further reading on finances for the freshly graduated:

• If You Can - how Millennials Can Get Rich Slowly
• The Millionaire Next Door - a classic compendum of research about high-net-worth individuals and how they got there.
• Bogleheads Getting Started
• Mr. Money Mustache - hard-core frugality and early retirement